Country Report: Turkey

December 14, 2012

Duan, Lan

Hammond, Adam

Singhal, Ishaan

Over the past couple of decades, Turkey has been an emerging economy with many

struggles and successes. In this country analysis, we will detail how their economy fared over

those decades and where we see the economy in the future. We hope to highlight their steady

growth periods and their economic and financial crises during this time. We will take a look at

some economic indicators and give a background of monetary and fiscal policies they have used.

GDP Analysis:

http://evds.tcmb.gov.tr/yeni/cbt-uk.html

There are four metrics that could be used to evaluate Turkey’s historical GDP. By

analyzing its growth trend, prosperity, distribution, and composition of output we can see a

holistic view on Turkey’s economy, and thus, make a better prediction.

First, when looking at its growth trend and prosperity, we found that from 1998 to 2012,

in general, Turkey’s Real GDP has a positive linear growth trend. Also, it caught our attention

that whenever Turkey had an increase in GDP, it was followed by a small fallback in its

economy. Turkey constantly had higher total output than previous years, and overall, the

economy generated the positive trend. However, in 2009, the economy was going through a

financial crisis, causing the economy to fall back to the level of mid 2007. But soon, in the

middle of 2009, the economy was recovering and quickly got back to the level before the crisis,

illustrating a prosperous developing trend up to the current level.

In terms of its distribution and composition of output, we can clearly see the most

important input lifting Turkey’s GDP upward, is its domestic consumption. Also, we can see that

in Turkey, non-resident expenditure within the country makes up a visible percentage. Therefore,

we can infer that Turkey has a strong tourism industry and strong investment opportunities the

country can partly rely on to continue expansion.

Unemployment:

Seasonally adjusted unemployment rate (%)

9,0

11,0

13,0

15,0

2005/1 2005/7 2006/1 2006/7 2007/1 2007/7 2008/1 2008/7 2009/1 2009/7 2010/1

Unemployment rate (original) Unemployment rate (seasonally adjusted)

Seasonally adjusted labor force participation rate (%)

44,0

46,0

48,0

2005/1 2005/7 2006/1 2006/7 2007/1 2007/7 2008/1 2008/7 2009/1 2009/7 2010/1

Labour force participation rate (original) Labour force participation rate (seasonally adjusted)

http://www.turkstat.gov.tr/PreHaberBultenleri.do?id=8401As time is needed to compute seasonally adjusted employment rate, we only have access

to the data through 2010. But it does not have an influential impact on the analysis. As the first

graph shows, before 2008, the unemployment rate was stable with little fluctuation. However, in

2008, due to the financial crisis, the unemployment rate soared to almost 15%. Later, the rate fell

back to 13%, but still remained high through the whole year. According to the latest data on

Turkey’s unemployment rate of 8.8%, we can see Turkey has been recovering from the crisis,

and is undergoing a quick development leading to an unemployment rate even lower than that of

2005.

By the Labor force participation rate, we can see that about 46.5% of the Turkish

population, during 2005 to the end of 2007, was actively in the labor force, while in 2008 there

was a downturn. After 2008, the participation rate has been increasing. This shows Turkish

residents are positive about their future development and willing to work. This illustrates that,

though Turkey has been traumatized by the economic recession, it pulled itself together to

become prosperous.

Inflation:

As the graphs show, prices in Turkey have been facing inflation. From the base year till

now, the both PPI and CPI have doubled over the past 10 years. However, its GDP has

quadrupled from 2003 till now, meaning that Turkey is quickly developing regardless of

inflation. As within the previous two parts, the PPI increased steeply in 2008, but soon regressed

back to the trend.

Producer Price Index (base year: 2003)

Consumer Price Index (Base year: 2003)

http://evds.tcmb.gov.tr/yeni/cbt-uk.html

It is surprising that in 2008, CPI in Turkey did not fluctuate drastically with the recession.

Turkey’s government must have done a good job to control the price inflation within a consistent

level, or the financial crisis did not have as much of an influence on the average residents’ daily

life as we presumed.

Interest Rates:

http://evds.tcmb.gov.tr/yeni/cbt-uk.html

The short-term interest rates (from 1 month to 1 year) from 2005 to 2012 have been

through a lot of changes. It is quite obvious that in 2008, the interest rate was as high as 26%.

We think there were two reasons that accounted for the phenomena. First, inflation made money

available in market more accessible. Therefore, the central bank had to increase the interest rate

to attract savings. Second, the recession triggered the insecurity of residents. They were trying to

spend for the fear of their money losing value. Thus, the high interest rates could partially ease

their fear and insecurity, and also attract the saving to prevent the malicious cycle of creating

more financial bubbles, which could potentially deteriorate the economy.

- Long-Term Interest Rate

www.tradingeconomics.com

As the information available to Turkey Government Bond 10Y only includes the data from

March to December in 2012, therefore, the analysis can be subject to short-sighted view.

From the graph above, we can see that at the beginning of the year, the long-term interest rate is

about 9.75%, and then gradually going through a downturn. Now, the current long-term interest

rate is 6.5%, which has been undergone about 33.5% decrease.

Compared with Turkey’s Inflation Rate, which fluctuated almost exactly as that of long-term

interest rate, we can see that actually investment in the long-term financial products is meaning

less as after the adjustment to the nominal interest rates, there is no profits from the 10Y bond at

all. Buyers will go through losses because overall the inflation rate is higher than the long-term

interest rate. From this, we can infer that Turkey central bank is trying to encourage spending

and consumption within the country instead of saving. We think one of the most important

reasons for the phenomena is that Turkey’s economy relies on consumption, and their low export

rate shows that their products are targeting the domestic market other than international market.

Thus, if Turkey central bank set up a high interest rate, especially a high long-term interest rate,

it would lock up the assets within the country, and consumption will greatly decrease, thus make

a negative influence on it GDP, by which could probably cause another liquidity crisis as it

happened in 1994.

Exchange Rates with USD:

The value of the Turkish Lira has been fairly consistent since 2002. It has fluctuated

within the range of 1.2 – 1.8 Lira/USD. In 2001, we saw a major depreciation in the Lira as it

became much weaker against the dollar. This was caused by the liquidity crisis in Turkey.

Therefore, the purchase power parity for an individual Turkish Lira is decreasing with the

exchange rates. There are some time-periods to focus on. In 2008 and in the middle of 2009,

Turkish Lira seemed to go through a difficult time to maintain its current value as the recession

was happening in 2008. But now, the Turkish Lira’s value is stable. Turkey is not a big country

for exports; therefore, the current exchange rate, which has depreciated recently, should be

advantageous for expanding exports.

Balance of Trade:

As a developing nation, and economy, Turkey’s exports and imports have been growing

substantially and due to a rising GDP per capita PPP and a strengthening, the imports remain

above the exports.

There are three points of interest when regarding the exports and imports since 1990. The

first point of interest is in 1994, when imports and exports both faced a sharp decline. The

second point of interest is around early 2001 when imports decreased substantially where there

was a trend of imports breaking away from exports. The other point of interest is in 2008, where

both imports and exports see a sharp drop, from which, they have just recovered.

http://evds.tcmb.gov.tr/yeni/cbt-uk.html

The peak of the graph in 1994 was due to a financial crisis faced by Turkey. Within a

more focused graph, we can see just how powerful the drop was during that time period. We see

a steep drop in the exports and imports represented in the graph. In fact, from the peak of the

time period, to the trough, exports decrease by 38% and imports decreased by 57%. Both of

these drastic changes came due to high inflation in the Lira.

In late 2000, early 2001, the drop was due to the liquidity crisis. This crisis took a toll on

the economy for a brief period of time and resulted in a period where between “November 20-

December 5 2000 ... US$6.4 billion net foreign exchange outflow took place and the overnight

inter-bank interest rates soared to 1,700%....”i This small period of exaggerated interest rates and

monetary outflow created pressure on the economy and imports plummeted 43% from $5.36

billion to $3.04 billion as the currency weakened. This crisis will be touched on again later in the

paper, but for now, we blame Bush for it since he was 17 at the time and most likely already

accepting money to play football.

http://evds.tcmb.gov.tr/yeni/cbt-uk.html

In 2008, there was a global financial crisis, started by the collapse of Lehman Brothers.

Even though the beginning of the crises was in America, it created a domino effect that reached

countries worldwide, including Turkey. As we can see in the graph below, both the exports and

imports of Turkey were greatly impacted. Imports decreased 55.9% from $20.56 billion to $9.07

billion and exports decreased 42.6% from $12.79 billion to $7.35 billion over eight-month

periods. Much of the crash was created by a sub-prime, real-estate bubble in America and not

due to domestic policies or actions in Turkey. Ironically, Turkey is now on the road to a real-

estate bubble domestically, that could harm the economy again in the future.

Debt and Deficit:

The gross debt of Turkey has been rising for the past couple of decades and is now at an

all-time high. The graph indicates a pretty convincing trend upward with the exception of the

time period centered on the global financial crisis in 2008. In reality, the decrease in debt was

probably greater than indicated from a Turkish perspective since the Lira appreciated against the

dollar in 2008, and the graph is in US Dollars. The exchange rate at the beginning of 2008 was

0.8547 dollars per lira; at the end of 2008, the exchange rate was 0.6494 dollars per lira.

However, even with the increase in debt, we see their debt to GDP ratio has been

decreasing since 2000 and had made a big drop from a high of 77.9% in 2002 to 39.4% in 2012.

This means their debt is being used wisely since the GDP must be increasing at a faster rate than

the debt level.

Another reason the debt in Turkey continues to rise is due to the consistent deficit

budgets run by the country. The most problematic area in the deficits is the current account

deficit, which is at a percentage of GDP that is unstable for this developing nation. “While the

deficit is down from as high as 10% of Turkey's $780 billion gross domestic product last year,

economists say that a gap of more than 5% is unsustainable...”.ii If Turkey cannot manage to

reign in the deficit spending in its current accounts, even with its growth, it will be difficult to

make the move to becoming developed economy.

In addition, this continuous deficit in the budget of Turkey, leads to higher borrowing

rates for the country. With the higher borrowing rates, it now costs more to run a deficit for the

country.

Credit Rating:

Turkey’s credit rating has recently been updated to a BBB- by Fitch; its first investment

grade rating since the financial crisis in 1994.iii However, ratings agency has claimed it will not

continue to strengthen its credit rating until Turkey begins to control its Current Account deficit.

Again we see the deficits maintained by Turkey as its main hindrance from moving up to a

stronger credit ranking. Once the rating increases, it will become less costly for them to borrow

long-term debt.

S&P - Foreign Currency LT DebtRating Date Rating Date Rating Date

BBB- 11/5/2012 Ba1 6/20/2012 BB 2/19/2010BB+ 12/3/2009 Ba2 1/8/2010 BB- 8/17/2004BB- 10/27/2009 Ba3 12/14/2005 B+ 10/16/2003BB- 1/13/2005 B1 12/21/2000 B 7/28/2003B+ 2/9/2004 B1 7/24/2000 B- 4/27/2001B 9/25/2003 B1 3/21/1997 B- 4/16/2001B- 3/25/2003 Ba3 1/9/1997 B 2/23/2001B 8/2/2001 Ba3 5/26/1995 B+ 2/21/2001B+ 4/2/2001 B+ 4/25/2000BB- 4/27/2000 B 12/13/1996B+ 12/20/1996 B+ 4/28/1994BB- 9/26/1995B 8/10/1994

Fitch - FC Curr Issuer Rating Moody's - FC Curr Issuer Rating

iv

Unfortunately for Turkey, the other two, widely used, credit rating agencies still rate

Turkey’s sovereign debt below investment grade. Moody’s and Standard and Poor’s have a

conservative outlook toward credit ratings in Turkey and the rise has been more gradual. Since

2003 the credit ratings for Turkey’s sovereign debt have only become better and better. They

have had no ratings decreases during that period. This could lead to Moody’s and Standard and

Poor’s upgrading their ratings in the near future.

Knowing the trend behind Turkey’s credit ratings allows us to view the country’s debt as

more of an investment, even though it has not yet reached those ratings on all of the scales. This

trend allows for further investment into the country, as it becomes a safer investment tool. More

investment should lead to additional growth for the country.

Asset Bubbles:

Previously, there have been a couple of detrimental asset bubbles to the Turkish

economy. One was recent, when the country fell victim to the real-estate bubble in 2008. Even

though there was no bubble domestically there was a global downturn in price of real estate. This

set off a chain reaction that led to a fall in imports and exports in Turkey.

Asset bubbles on the horizon, are something Turkey needs to be aware of moving

forward. One such bubble could be a result of unsustainable capital inflows. As Erdem Basci,

central bank deputy governor, said in 2010, “strong capital inflows, fuelled by quantitative

easing in developed economies, could create asset bubbles in emerging economies. The best

response would be to cut interest rates gradually, while using other tools to restrain domestic

banks’ loan growth, he argued.”v Thus far, this has not happened. Developed economies have

participated in quantitative easing multiple times since the 2008 financial crisis. Mr. Basci is

concerned all of the monetary easing taking place will create stronger capital inflows for

developing economies, such as Turkey. This means, the investments made in the emerging

economies will drive up the prices of assets in those economies. Therefore, Turkey must

counteract these policies by cutting interest rates domestically and restraining growth spurred by

banks loans.

On top of that, Turkey could also be facing a real-estate bubble in the domestic market.

Lately, home prices across Turkey have been rising at a substantial rate. “In fact, it was recently

revealed in the Turkey Real Estate Investment Outlook 2012 report from Castle Research, units

that had a going rate of $1,500 USD per sqm [square meters] less than ten years ago have now

reached a high of about $10,000 USD per sqm.”vi These continually rising prices, especially at

such a high rate, could certainly lead to a bubble in the future. However, thus far, the supply of

houses has not been keeping up with the demand, causing prices to rise. This in itself is not

problematic, but when properties are being purchased as investments, it does become a problem.

Investments are traded tools (they are bought and sold). This means, at some point, those who

“invested” in real estate will need to sell their holdings. When a bearish market for investing in

Turkish property begins, we will see the bubble pop.

Fiscal Policy:

Fiscal Policy is the use of government revenue collection (taxation) and expenditure

(spending) to influence the economy.vii Turkey is a growing economy. It has made significant

progress over the last two decades regarding fiscal consolidation and a strong reform of fiscal

policy. Turkey has come a long way from being a fragile country of the 90s to become a

successful transition model.viii

Turkey was not as affected by the last global economic crisis as some other countries.

The public finance suffered lower losses. The Turkish government announced a Medium-Term

Program in Oct 2010, covering 2011 to 2013. The program essentially spoke about the how the

general government deficit can be reduced as a part of GDP by 2013. Some of the predictions

made in this were a growth of 7% in the GDP (6.8% cautiously speaking). Looking at the factual

evidence, the Nominal Interest rates have been declining on the government’s borrowing

(currently at 8%). That’s the reason why the Turkey is on the verge of being upgraded to

Investment Grade Credit Rating, by multiple agencies, as discussed earlier.

These achievements have been made possible due to the fiscal policies formulated and

updated by the government over the years. The two time periods making this happen were the

1990s and the 2000s where Turkey went through three big recessions followed by the strong

fiscal transformations. First Fiscal Law towards Turkey’s ever strengthening economy was

submitted to the parliament in the first half of 2010.

Fiscal Stance of 1990s:

Deficit Financing is seen as a way to create funds for a country. It is when a government

spends more money than it receives revenue, and the difference is made up for either by

borrowing money or minting money.ix Since Turkey has limited domestic savings it extensively

depends on external financing. The advantage of meeting social and physical infrastructural

expenses is lost on the higher interest rates on the borrowed money. The economy becomes weak

since the current account balance gets severely disturbed.

As it can be seen from the above table the public sector balance was under a serious

deficit from 1990, over to 1999 where it ended at 11.7% of the GDP. The primary reason behind

this was the excessive deficit financing Turkey applied. As a consequence of this, the public

sector interest payments grew significantly, from 3.8% of GDP in 1990 to 11.5% of GDP in

1999 and the Nominal Interest Rates more than doubled (53.0% to 109.6%). Since the country

wasn’t making sufficient revenue, the debt kept on increasing every year, and the higher interest

rates made it difficult to repay the debt, this led to a deadlock in the Turkish economy.

Some of the salient features of the fiscal policy in the 1990s, which resulted in a difficult phase

for Turkey, were:

Limited scope of the budget was submitted to the parliament, excluding a good portion of

government expenses.

Improper classification of the budget which wasn’t as per the international standards.

Public Procurement System was inefficient

Monitoring and Reporting of debts and public accounts wasn’t appropriate.

Complex Tax Exemptions and exceptions had resulted in considerable loss of the

country.

Multi-year budgeting technique was followed under which Turkey did not give any

regard to the consequences implemented actions on the subsequent years.

Negligence of Strategic Decision making for the public agencies, development plans etc.

led to incorrect assessment of the expenses.

In short, the fiscal policies of the 1990s had serious flaws leading to the severe crisis situations in

Turkey.

Fiscal Stance of 2000s:

After the horrors of the 1990s, it became important to reform the fiscal policies which can

bring the economy of Turkey to a better position. Turkey finalized the 17th stand-by arrangement

with the IMF (International Monetary Fund) with an aim of attaining price stability, self-

sustained banking system (within Turkey) and tightened fiscal policy. The intention of the fiscal

policy here was to increase the savings pool for private sector investments, which had

deteriorated in the 1990s. The unfortunate environmental disaster, in Dec 1999, shook up the

economy quite badly leading to the 4th crisis in the country in a little over 10 years. The

bankruptcy of several banks led to an extraordinary liquidity shortage in the country and hence a

record high interest rate on borrowing (200%).

Starting 1999 Turkey imposed a new set of taxes to overcome the situation. Turkey saw a

positive light of hope in the 2000-2001 in public sector primary balance in terms of surplus ratio

of GDP. Fiscal consolidation proved to be a very significant undertaking by Turkey for

economic growth. The future stand-by arrangements with IMF (18th and 19th) were as profitable

for the country as the 17th. Turkey was able to decrease its debt stock quite rapidly over the

period of next 9 years from 77.6% in 2001 to 39.5% in 2008 (as a ratio of GDP).

As it can be seen in the above table, with an exception of 2001, the interest rates and the

public sector balance have been steadily improving. The nominal interest rates have been falling

as well.

The Fiscal Rule Law draft consists of 12 articles which speaks about the fiscal laws of the

country and assigns responsibilities clarifies operation of the rules and defines rules for

monitoring and reporting the principles of the rule. The government deficit rule was the

backbone of this draft. The rule spoke about combining the program and the fiscal plan in one

document to make multi-year budgets more effective. The general government data was to be

published quarterly to ensure healthy monitor and evaluation of the fiscal rule. Turkish Court of

Accounts was given an auditor to ensure the accounts conform to global standards.

Fiscal Consolidation brought about a lot of positive changes in the Turkish economy in

the 2000s. The country is still developing and the growth rate has been significant over the past

few years.

Monetary Policy:

Monetary Policy is the actions of a central bank, currency board or other regulatory

committee that determine the size and rate of growth of the money supply, which in turn affects

interest rates. Monetary policy is maintained through actions such as increasing the interest rate,

or changing the amount of money banks need to keep in the vault (bank reserves).x

During the global financial crisis, the central banks of various advanced economies

implemented certain monetary easing policies for Turkey, which led to availability of sufficient,

low-cost and short term external financing. This led to rapid credit growth and gradual rise of the

Turkish Lira. Central Bank of Turkey (TCMB) has put in line a new strategy towards reducing

the macro-financial risks. During the period of adoption of new policies around November 2010

to August 2011 (when the European economy was going down) the TCMB had a tough time to

balance between the short term capital flows and preventing excessive appreciation of the

Turkish Lira on one hand and ensuring a more controlled growth in domestic credit and demand

as well as balancing the demands, externally and internally on the other. Since the European

economy was fluctuating significantly during that period, TCMB had to ensure similar problems

didn’t occur in the country. So they limited the number of short term capital flows and used the

money to strengthen the TCMB reserves.xi

http://www.tcmb.gov.tr/yeni/announce/2012/Mon_Exc_Pol_2012.pdf

As it can be seen from above, the Turkish Lira was appreciating quite rapidly and to

avoid the volatile exchange rate movement as in the other emerging economies, control over the

inflow of money was implemented by the TCMB. The Interest rate corridor policy was the tool

used by TCMB actively and will used in future as long as the economy remains volatile.

Historical and Political Factors Affecting the Turkish Economy:

The Turkish economy has fluctuated considerably in the past. As discussed earlier in the

article the economy fell due to the three major financial crises in the 1990s and one in early

2000s. The Persian Gulf War in the 1991 led to imposition of embargo on Iraq by UN, which led

to loss of business with Iraq. The loss was compensated by Saudi Arabia, Kuwait and UAE, by

1992 the economy started to grow again. In 1994, the second crisis hit Turkey when the

government’s move of large salary increase to civil servants and increased transfers to state

enterprises raised the public sector borrowing. Turkey used the high performance feedback of

Wall Street in the 80s to attract external funds which was got translated lower domestic interest

rates and private sector borrowing. This was an unexpected outcome and resulted in higher short-

term debt. The economic crisis rose due to lack of confidence in the government for the balance

payments. There were disputes which rose between Prime Minister Tansu Çiller and TCMB due

to the difference in ideas. The differences lead to downgrading of the Credit rating of the country

and resignation of TCMB governor. The dollarization of the economy, during the mid-1990s, by

the residents (people hold a foreign currency deposit, US$) weakened the economy further.

Government had to release the foreign currency reserves to avoid the declining Turkish Lira.xii

Trade Barriers:xiii

Trade Barriers are the impositions which are put forth by the government to restrict trade

with other nations. They are responsible for the reduction in the economic efficiency of a

country. xiv Trade Barriers include various forms discussed as follows:

Tariffs:

Tariff is generally defined as the tax imposed on the export or import in and out of a

country. Turkey use the European Union’s (EU) common external custom tariff to third country

nonagricultural imports (including from the United States) and does not impose duties on

nonagricultural items from EU and European Free Trade Association (EFTA) countries. A high

tariff rate is maintained for the food and agricultural products.

Import Licenses:

These are required essentially for the after sales servicing of products, agricultural

products and distilled spirits. U.S. firms have reported difficulties in the receiving the import

license due to the lack of transparency in the license policy, esp during the harvest season of

Turkey when the products tend to compete with the local market. The Turkish government has

taken steps in this direction to improve the tax structure. Certain policies have been made more

liberal for the spirits and tobacco market of Turkey.

Government Procurement:

Under the Public Tender Law, foreign companies can participate in the state tenders

valued above a certain limit, with a preference of up to 15% to domestic bidders (unless they

form a joint venture, where the preference is lost).

Export Subsidies:

To promote the export of products, Turkey has employed several export incentives. The

figure ranges from 5 to 20 % of the export value. Since the country doesn’t have many resources

to export, generally agricultural products receive maximum subsidies in this respect. The EU

directives and WTO commitments keep them under check.

Service Barriers:

Telecom Services – The Electronic Communications Law No. 5809 was brought into

effect in 2008 to clarify the role and responsibility of the Turkey’s Regulator along the lines of

EU’s framework. Suitable bans on the internet content were a part of the law as well.

Other Service Barriers – Citizenship of the country is required to be a certified accountant

or represent courts. Approval for foreign doctors operating in Turkey is under processing.

Investment Barriers:

Turkey is quite liberal in terms of private firms developing projects in energy markets

subject to approval from Energy Market Regulatory Authority. The process for foreign

employers to obtain a Turkish work permit has always been criticized. It has been described as

time-consuming, involves extensive documentation, adjudication process is lengthy and approval

chances are low. Real Estate ownership has been a controversial issue in Turkey for a long time.

‘No foreign individual may own more than 2.5 acres, and all foreign individuals together can

own no more than 10 percent of the land in any given development zone.’ It is tough to

determine the land acquisition by any foreigner and hence an obstacle for new ventures. But, the

law is quite relaxed if the company has a legal presence in the country and the land is used for

business activities only.

Other Barriers:

Corruption has been noted as one of the very prominent barrier in Turkey. This has been

perceived as a problem for many foreign investors. The taxes on motor vehicles is not fixed;

based on the engine size it varies from 37% to 130% for vehicles imported from US.

Corporate Governance:

Turkey’s Corporate Governance policies have been improving and the transparency of

the country has improved significantly. Barring certain aspects like protection of minority

shareholders, controlling shareholders, Turkey has shown positive outlook as per OECD.

Pharmaceuticals:

The pharmaceutical industry is suffering the same way Real Estate is. The complex and

stringent policies is making it tough for the US firms to launch new products in Turkey. On top

of that, asking for a significant discount in prices, on the grounds of budget shortfall, has been

demotivating the companies to invest in Turkey.

International Investment Position:

International Investment Position (IIP) gives the financial claims, reserve assets and

financial liabilities of the Turkish Residents from non-residents.

http://www.tcmb.gov.tr/yeni/eng/

The net IIP is defined as the difference between the external assets and the liabilities. It

can be seen from the graph that the liabilities were raising drastically in the early 2000s. This is

because of the extensive short-term debt which had been flowing into the country. This money

was used to invest into the growth of the assets and hence the corresponding rise in the asset can

be observed. The liabilities had a sharp fall during the 2008 recession and then the rise has been

very gradual. The gradual rise is understandable due to the conservative monetary policies which

were implemented by the TCMB. This is why we can observe a gradual rise in the assets after

the 2007 period.

Turkey’s Future:

For the next year or two, we predict the economy of Turkey will continue its expansion

of the recent past. We have seen data of an increasing Real GDP over the past couple of years

and do not foresee that trend ceasing. Reasons for the recent increases in Aggregate Supply

include a stronger job market by both a higher labor force participation rate and a lower

unemployment rate. These two indicators will shift the Long-Run Average Supply Curve to the

right. The Aggregate Demand curve will also shift to the right with a combination of lower

interest rates to encourage more buying, a steady exchange rate, rising consumption levels, and

an increase in imports. These two curve shifts will create a new equilibrium resulting in a higher

Real GDP. Prices could be higher, lower, or the same depending on the size of the shifts in the

curves.

Either way, with an increasing rate of full employment and a higher Real GDP, the

Turkish economy should continue to grow stronger. With this continued growth, we expect

Turkey to eventually warrant consideration for being a developed economy.

YF’YF

LRAS’LRAS

AD’AD

Real GDP

P

Endnotes:

i Alper, C. Emre. “The Turkish Liquidity Crisis of 2000: What Went Wrong.” Russian and East

European Finance and Trade 37.6 (2001): 58–80. Print.

ii Candemir, Yeliz, and Emre Peker. “Turkey Reins in Current-Account Deficit.” Wall Street Journal

11 Oct. 2012. Web. 11 Dec. 2012.

iii Peker, Emre. “Turkey Exits Junk Status.” Wall Street Journal 6 Nov. 2012. Web. 11 Dec. 2012

iv Bloomberg L.P. "Table of Historical Credit Ratings for Turkey" (2012). Bloomberg database.

Bentley University Trading Room, Waltham, MA. 12, December 2012.

v Istanbul, Delphine Strauss in, and Stefan Wagstyl in London. “Capital Inflows to Turkey Spur Rate

Cut Plan.” Financial Times 13 Dec. 2010. Web. 12 Dec. 2012.

vi http://www.antalyahomes.com/residential-real-estate-prices-in-turkey-continue-to-rise. Accessed on

12 Dec. 2012.

vii O' Sullivan, Arthur; Steven M. Sheffrin (2003). Economics: Principles in action. Upper Saddle

River, New Jersey 07458: Pearson Prentice Hall. pp. 387. ISBN 0-13-063085-3.

viii Kaya, F., & Yılar, S. (2011). Fiscal Transformation in Turkey over the Last Two Decades.

ix “Deficit Financing (economics) -- Britannica Online Encyclopedia.” Encyclopedia Britannica.

Web. 14 Dec. 2012.

x “Monetary Policy Definition | Investopedia.” Investopedia. Web. 14 Dec. 2012.

xi http://www.tcmb.gov.tr/yeni/announce/2012/Mon_Exc_Pol_2012.pdf. Accessed on 12 Dec. 2012.

xii http://lcweb2.loc.gov/frd/cs/trtoc.html. Accessed on 12 Dec. 2012.

xiii http://www.ustr.gov/sites/default/files/Turkey.pdf . Accessed on 12 Dec. 2012.

xiv http://www.businessdictionary.com/definition/trade-barrier.html. Accessed on 12 Dec. 2012.